Becoming a consultant has the same legal hurdles as any ordinary business. If you decide to be a consultant, you will still need to go the extra mile to protect yourself, your intellectual know-how, and your business. This article will review the basic legal issues you will face as a consultant and how to deal with them.
Consultants usually lose the rights to their work
Some consultants are able to negotiate with their clients that any work provided is copyrighted. That means that any intellectual property you produce for your client remains your property and they cannot replicate it. However, most clients do not like this idea and will actually insist that your work is made for hire. Therefore, the work is theirs and you cannot replicate it. Yet, as a consultant, you may find times when you need to reference your previous works to help future clients. Discuss with your current client the possibility of retaining the right to produce similar work for others.
Consultants should establish a business entity to protect personal assets
Just like any other business, consultants should establish an entity that protects personal assets. Consultants are able to incorporate their business to both save on taxes and also keep their personal assets out of reach. Worse case scenario, if a client sues - you will be protected so long as you acted properly as a corporation. You can find out the different business entities and file for one from self-help websites like Legal Zoom or Docstoc.
You still have to pay taxes
You should consult with a tax professional before you start your consulting business. If you do not create a business entity, you are still subject to a self-employment tax. If you are a business entity, you may still have to pay corporation taxes and fees. Some states still tax on services, so be sure to check if it exists and what the rate is so you can file to pay those taxes properly.
Consultants need professional and general liability insurance
Consultants, just like a professional corporation, need to cover him or herself in case their professional advice goes awry. If you advise someone to implement a program and causes severe business loss and the client sues, you need professional liability insurance to cover the expenses. On the other hand, all businesses need to get general liability insurance that covers everything else. This type of insurance covers you in case your office burns down, things get stolen, or a client gets hurt at your office.
Check your status: independent contractor or employee
Consultants are always independent contractors. However, some clients may actually hire consultants to work in-house and therefore these consultants become employees. The way the client interacts with you also tells you a lot on whether you are an independent contractor or employee. Check out the IRS article that distinguishes the two. There are different tax consequences of each.